Friday, August 05, 2005

Productivity is the Loneliest Number but still no. 1

I had an interesting e-mail from an economist who wanted to remain anonymous. He/she pointed out that Productivity is only one variable and that the Trustees had a stochastic analysis that validated the current exhaustion date. Let me make a couple of points here.

One, Productivity is shorthand for the whole range of economic numbers. It is true that the other numbers can vary, but many of them, like real-wage growth, have been tied to Productivity. True there are rumblings that this linkage is breaking down but it is incumbant on others to show how that offsets the huge gap between projected and actual Productivity. If Productivity was coming in at 2.2%, barely above the 2.1% used by Low Cost, I would still have a good case that we were on the road to solvency under the "if this goes on" theory, but I wouldn't be so cocky. My advice would still be to do nothing, if we are beating the model we are beating the model. But in the real world Productivity is coming in above 3.0% and now we are entering "what if" territory. "What if" 2005 ends up with a number over 3.0%? My answer is Solvency. Others can knock me off that mountain, but just pointing out that the other numbers of Low Cost are similarly optimistic compared to Intermediate Cost doesn't buy anything. Show me that they are being undershot by enough to offset the dominant variable. I am open to argument.

Two, I have never claimed to be an economist. But embedded in that stochastic analysis (which is studded by so many qualifiers and warnings about methods and reliability of projections to start with) is this sentence: "Each time-series equation is designed such that, in the absence of random variation, the value of the variable would equal the value assumed under the intermediate set of assumptions" (2005 Report p. 159). Near as I can tell all this analysis is doing is allowing variation around the assumed ultimate numbers under Intermediate Cost for the out years and seeing what happens. Given that in past years the Trustees have asserted that variations in the out years have little influence of ultimate results, it is not surprising that the results of this admittedly experimental model validate that. This is a relatively new part of the Report, introduced in 2003, and in this humble bloggers opinion is more intended to confuse and give some greater validity to Intermediate Cost than is warranted. You assume Intermediate Cost numbers as your point of departure and you would expect the outcome to vary around the projected result.

But it is near term numbers that are the big drivers, small changes at the beginning of a curve have outsize effects on its ultimate values. I have been begging professionals to weigh in from day one. Show me reasons why I should not just take Low Cost at face value. This was a nice, if private first step. Not entirely persuasive, but welcome.